Daily Newsletter, Saturday, 5/13/2017

Table of Contents

Market Wrap

Slowly Fading

by Jim Brown

The big cap and small caps indexes posted another day of minor declines but the Nasdaq bucked the trend.

Weekly Statistics

Friday Statistics

Four of the FAANG stocks posted gains but Google closed fractionally lower. The Nasdaq was helped by a big $13 gain in Amazon after Mark Cuban said the stock was significantly undervalued and still in "startup" status. He believes Amazon has so many efforts underway where they have less than 5% of the market that the stock could be significantly higher in the coming years. That gain helped improve Nasdaq sentiment and lift Facebook, Apple and Netflix. The Nasdaq Composite only gained 5 points but the Nasdaq 100 big cap index gained 12. Chip stocks and biotechs also contributed to the gain that pushed the $NDX to a new closing high.

The small cap Russell 2000 closed back below critical support at 1,388 because Friday was "ranking" day for the Russell indexes. Every June the Russell company rebalances their indexes and moves stocks in, out and around in their classifications. Currently there are only 2,935 stocks in the Russell 3000 because of companies that merged with others over the last year. Russell Rebalance Info

In the middle of May, Russell calculates their ranking of all stocks by market cap. They will provide a list in early June of which stocks will be leaving the indexes and which stocks will be added. This published list allows traders to game the system and jump in front of fund managers that will be selling stocks that are leaving the index and buying new stocks at the close on June 23rd.

The movement in individual stocks leaving the index can be significant. There is roughly $12.5 trillion dollars indexed to the various Russell indexes. About $9.7 trillion is indexed to active funds. Source Obviously all of that money is not indexed to the Russell 2000 but there is a significant amount.

The normal rebalancing process depresses the Russell indexes on the notification dates because traders are selling the stocks that are leaving the indexes and buying the stocks that will be added. The indexes only benefit from half of that scenario since buying stocks not currently in the index does not impact the index but selling current index components does have an impact.

Friday was ranking day at the close. Since the methodology of the reconstitution is well known, portfolio managers and hedge funds can do their own ranking based on the market cap at the close on Thursday. This allows them to speculate on which companies will be added and dropped before the Russell lists are actually published. Many have already calculated their own list and stocks were bought and sold on Friday in anticipation of the official ranking.

Russell will release the preliminary list of official changes on June 9th and update it again on June 16th. The actual rebalance will be at the close on Friday June 23rd. More than 15 billion shares traded on the June 24th rebalance last year.

Historically, the rebalance has weighed on the Russell indexes around the critical dates. However, this is a six-week period and volatility around the critical dates will be higher but over the entire six weeks the impact is negligible but it is normally negative. I suspect there was an impact on the Russell 2000 on Friday because the 0.53% decline was more than triple the percentages on the other indexes.

The economic events were positive on Friday but the retail earnings missed estimates. The Retail Sales for April rose +0.4% compared to estimates for +0.6% and a minor +0.1% gain in February. Sales excluding autos were +0.3%. The strongest areas were electronics at +1.3%, building materials +1.2% and non-store retailers at +1.4%. The weakest sectors were home furnishings -0.5%, food and beverages -0.3%, clothing -0.5% and general merchandise at -0.5%. Overall, retail sales are up 4.5% over the same period in 2016.

The Consumer Price Index (CPI) for April rose +0.2% after a -0.3% decline in March. The headline number matched analyst estimates. Food rose +0.2%, goods fell -0.2% and services rose +0.1%. On a year over year basis, the CPI is up 2.2% and in line with Fed expectations.

Consumer sentiment for May rose slightly from 97.0 to 97.7 in the first release. That is only slightly below the 12 year high of 98.5 in January. The present conditions component was flat at 112.7 and the expectations component rose slightly from 87.0 to 88.1.

Business inventories for March rose +0.2% and the smallest gain since October but it was higher than estimates for +0.1%. Retail inventories lead the gains at +0.49% compared to wholesalers at +0.18% and a drop of -0.01% by manufacturers.

The slightly better than expected inventories plus the rise in retail sales helped lift the Atlanta Fed real time GDPNow forecast for Q2 to 3.6% growth.

The economic calendar for next week is highlighted by the Philly Fed Manufacturing Survey on Thursday. This is considered a proxy for the national ISM manufacturing in two weeks. The new home construction on Tuesday would be the next most important with a sharp increase expected.

ArcelorMittal (MT) is doing a reverse 1:3 stock split next Friday.

Ball Corp (BLL) is splitting 2:1 on Tuesday. They increased their dividend by 54% to 20 cents. They have a post split buyback authorization for 20 million shares. They have 175 million shares outstanding and will have 350 million post split.

Ball is an interesting company. They make aluminum cans for beverages and consumer products. They make billions of soda cans, aerosol paint cans, etc. They also develop spacecraft, satellites, radio systems and defense systems. If there was ever a company that needed to do a spinoff to separate it is Ball. Unfortunately, the chart is terrible because the diverse businesses have choppy earnings patterns.

Advertising platform company The Trade Desk (TTD) reported earnings of 18 cents on revenue of $53.4 million. Analysts were expecting a 3-cent loss and revenue of $43.4 million. Shares exploded higher for a 30% gain.

JC Penny (JCP) reported adjusted earnings of 6 cents but that included sales of $125 million in assets. Analysts were expecting a loss of 21 cents but that did not include the asset sales. Revenue of $2.7 billion missed estimates for $2.8 billion. Same store sales declined -3.5% compared to estimates for a -0.7% decline. The company reaffirmed full year guidance for earnings of 40-65 cents and comp sales in a range of -1% to +1%. Analysts were expecting 48 cents.

The Penny's earnings came the day after Nordstrom (JWN) reported an -0.8% drop in same store sales. Earnings of 37 cents beat estimates for 26 cents and revenue of $3.3 billion matched estimates. Shares of Nordstrom fell almost as much as Penny's.

The retail sector is struggling. Online retailers are making inroads into the normal bricks and mortar sector and it is slowly taking its toll. U.S. retailers caused their own problems over the last decade as they overbuilt with a mall at every major intersection. The U.S. has four times the retail space per capita by square foot as Europe and six times the space in Japan. Chains like Macy's, Kohl's, Penny's, Sears and other big box retailers competed to be the anchors in every mall. The smaller stores inside the malls are struggling even worse. With the malls dying, there have been more than a dozen retail chain bankruptcies and analysts believe there will be a dozen more.

Macy's (M) is in the midst of a restructuring and closing of 68 non-performing stores. Analysts claim they need to close 100 more. They reported earnings earlier in the week of 24 cents that missed estimates for 36 cents. Same store sales declined -5.2% and revenue fell -7.5%.

Sears Holdings (SHLD) shares plunged after CEO Eddie Lampert went off on the media and blamed them for the decline in Sears sales. He complained in multiple forums that the appearance of a slow spiral into bankruptcy was because of media coverage. Consumers read a headline about the impending bankruptcy and they mentally drop Sears as a potential stopping point in their shopping trip. Personally, I think it is because they have been to a Sears recently and saw there was no inventory and no employees and found no reason to return. I have posted pictures of empty stores multiple times over the last year. Sears shares fell -20% over two days on the rant from Lampert.

There are more retailers reporting earnings next week with BOOT, DKS, HD, SPLS, TJX, URBN, AEO, LB, SMRT, TGT, BKE, BONT, ROST, SSI, WMT and FL. This is the heaviest week for retailers. If we look at the results from the prior two weeks, the overall expectations are negative. However, Dicks, Home Depot, Target and Walmart should perform the best.

Other highlights include Jack in the Box, Alibaba and Salesforce.com. Dow components include HD, CSCO and WMT.

More than 450 S&P companies have reported earnings. The average growth rate is 14.7%. More than 75% have beaten estimates and above the long-term average of 64% and the short-term (4 quarters) average of 71%. More than 63% have beaten on revenue compared to the 59% and 53% averages. For Q2, 59 companies have issued negative guidance and 30 have issued positive guidance. Only 19 S&P companies report earnings next week and 39 over the next two weeks. The earnings cycle is rapidly drawing to a close.

Apple (AAPL) sold $7 billion in new debt to bring their total debt to more than $98 billion. Apple borrows money at roughly the same interest rate as the 10-year treasury so they do not have to transfer cash from overseas and pay a 35% or higher tax rate. If Apple sells a phone in the UK, it pays income taxes in the UK on that profit. If Apple transfers the money to the U.S. it has to pay income taxes again at a much higher rate. Apple and other companies with billions overseas are hoping President Trump can get a repatriation tax cut if a bill ever makes it to a vote. That is no longer expected in 2017. The interest they will pay on the debt is far less than they would pay in taxes. Apple is using the money for buybacks and other corporate purposes.

On a side note, we reached $700 billion in 2017 corporate debt issuance and the fastest year on record to that number. Intel and Amgen also did debt offerings recently to avoid bringing cash back to the states.

Apple shares gained another $2 on Friday after Goldman Sachs said the iPhone 8 will definitely cost over $1000 and could "drive meaningful upside in revenue over the next 12 months." Goldman raised their price target from $164 to $170. The analyst said the base models will probably start at $999 and $1,099 and go up from there. That compares to $749 as the base price of the 128GB iPhone 7. The average selling price (ASP) of the phones is going to explode higher and with expected full year sales of 243 million phones the revenue is going to rocket higher. Analysts believe the actual costs to manufacture the phone will rise $79 to $104 each. That is $35 for the new OLED screen and $19-$24 for faster memory and various increments for other components.

Sprint and Softbank have started merger talks with T-Mobile (TMUS). Softbank is the majority owner of Sprint and Deutsche Telekom owns 64% of T-Mobile. Telecom mergers have been barred for almost a year by the FCC as they conducted $20 billion in wireless spectrum auctions. The ban specified that merger talks could begin after April 27th. Sprint tried to buy T-Mobile in 2014 but the deal was blocked. Since then T-Mobile's market cap has risen to $55 billion and $23 billion more than Sprint.

Despite having the lowest rates in the U.S., Sprint is having trouble adding customers. They are currently fourth place in market share. With AT&T trying to buy Time Warner for $85 billion, Sprint believes it could also receive offers from other cable companies like Charter or Comcast.

General Electric (GE) was downgraded by Deutsche Bank from hold to sell. The analyst cut the price target from $28 to $24 citing weak earnings and weak cash flow. "GE's weak cash flow has become worse in recent quarters. On an operating basis, excluding GE Capital dividends and proceeds from business and asset divestitures, GE does not appear to be generating sufficient cash flow to sustain its operations." Despite revenue of $27.7 billion in Q1, the company was -$1.6 billion cash flow negative. The company is trying to sell its consumer lighting business, GE Water and GE Industrial Solutions. Combined they generate about $5 billion in annual revenue. Shares fell 2% to a 52-week low at $28.

Boeing (BA) said it had resumed flights of the 737 MAX and it had received approval from regulatory agencies. The flights had been halted after a potential problem was found on LEAP 18 engines with a part manufactured by CFM International, a joint venture of GE and France's Safran. CFM said potential flaws in the forging of a disc inside the engine could have led to cracks. The company said they expected to have the problem parts replaced within "a few weeks." There was no problem with any operational aircraft and planes without the LEAP 18 engines were still flying. Boeing expects to make its first commercial delivery of a 737 MAX later this month.

Wal-Mart (WMT) said it acquired Moosejaw.com, a retailer that specializes in outdoor apparel and camping gear. Moosejaw carried brands including Woolrich, Marmont, Camelbak, Patagonia, North Face and 400 others as well as its own Moosejaw brand of apparel. Wal-Mart purchased Jet.com for $3 billion last August and ShoeBuy.com for $70 million in December. Wal-Mart is racing to grab market share from Amazon and recently changed their online store to free two-day shipping for orders over $35. Wal-Mart's ecommerce sales rose 20.6% in the last quarter. Wal-Mart reports earnings this week.

Crude prices rebounded nicely for the week to close at $48 after the EIA reported a -5.3 million-barrel decline in inventories. This was actually the fifth consecutive weekly decline but also the largest. OPEC meets on May 25th to discuss future production cuts and expectations are growing for an extension and possible an increase in the cuts.

The blue line is the current oil inventory level and the gray band is the five-year average range. Clearly, we have been above that range for a long time but the direction is positive. We could be back in the five-year range in the next several weeks. This would be positive for prices.

This is a long-term chart of crude inventories and you can see how levels spiked from the surge in shale production just two years ago. It would take a major event to put the inventories back into the "normal" range. Our best hope of that happening is the roughly 1.5 million bpd annual increase in demand. If OPEC could maintain limits on production for a couple years the normal depletion rate plus the normal demand increase, would solve the problem.

Markets

All the major indexes traded down for the week with the exception of the Nasdaq. The week started good with the S&P trading over 2,400 on Tue/Wed and even closing at 2,399.63 and a new high on Wednesday. Unfortunately, the Dow was not cooperating and the steady weakness that started after Tuesday's open, dragged the big cap indexes lower.

The S&P dipped to 2,394 on Thursday Morning and the low for the week. The dip was bought but the index could not make it back to positive territory. Friday's decline was due to weekend event risk and the loss was minimal and on the lowest volume since April 17th at 6.06 billion shares. The market decline over the last three days was not a sell off. It was a lack of interest. We are lacking any material catalysts and we have plenty of political diversions.

Current support on the S&P is just above 2,380 and there are no indications of material selling pressure.

Apple is doing an excellent job of supporting the Dow and the Nasdaq. McDonalds has continued to make new highs with Home Depot and Visa not far behind.

The Dow chart is bearish. The index closed below support at 20,900 and dipped below secondary support intraday on Tuesday at 20,800. The Dow needs a catalyst. With HD, CSCO and WMT reporting earnings this week we could have some catalysts but they may not all be positive. The Dow is suffering from post earnings depression since the majority of its components have already reported.

Friday's close was critical. It was only 4 points under support so for our purposes it held. However, any further declines will begin to target a gap fill from the two short squeeze gaps at the end of April. The Dow has been moving slowly sideways in a very narrow trading range since that short squeeze. The bias has changed to bearish and it will turn more so if support at 20,900 is violated any further.

The Nasdaq indexes remain the most bullish. The Composite made a new high on Wednesday and closed only 8 points lower on Friday. The Nasdaq 100 big cap index closed at a new high on Friday by 5 points. Facebook, Apple, Amazon and Netflix all contributed but Google was a fractional laggard. Chip stocks and biotechs also provided support with the Biotech Index up +38 points or +1.07% in a weak market.

As you can tell by the Nasdaq 100 chart below, the tech stocks are very overextended and they will eventually rest. Whether that is this week or even this month, nobody knows but it will happen.

Both small cap indexes broke down with a three-week low on the S&P-600. This could be related to the Russell rebalance but that would be speculation. The steep declines over the last two days suggest portfolio managers are taking cash off the table.

Event risk has returned but not in the form that we would have expected. On Monday, Washington was talking about healthcare and tax reform and then on Tuesday Comey was fired. The manner it was done, the conflicting stories and excuses, the slander of Comey and the threat of secret recordings, all combined to cause a violent uproar in the media. Healthcare and tax reform have been forgotten and the witch-hunt for Russian collusion has now taken on a new importance for the democrats.

Trump had the right to fire Comey. Reasons were unimportant because he is appointed at the will of the president. It was all the other headlines that made it important. Investors were laser focused on tax reform and healthcare. Now that they have been pushed onto the back burner, the potential dates have slid significantly. One prominent senator said we will be lucky to get healthcare in 2017, if at all, and tax reform may have to wait until after the midterm elections.

This is eventual death for the stock market. All the optimism built into the post election rally was fueled by tax reform, deregulation and infrastructure spending. Healthcare was of lesser importance to the market. Once investors understand that everything has been pushed back by months instead of days, it will be market negative.

Everyone was previously targeting getting healthcare reform signed into law before the August recess. That is only 39 working days away for the House and there is no chance of even getting a bill voted on before then in the Senate, much less spending a couple months battling it out in the conference committee and the amended version making its way to both the House and Senate again. Most investors do not understand this 39-day calendar. As realization dawns, it may not be pretty.

Right now, nobody wants to sell and pay taxes on profits if those taxes are going to be cheaper several months from now. If the market begins to decline and tax reform has shifted to 2018, there could be a mass exodus from equities. The yield on the ten-year treasury closed at the low for the week on Friday as investors began to realize the market could be in jeopardy.

Adding fuel to the event risk fire, North Korea tested a new ballistic missile on Saturday. The missile flew 435 miles and was considered successful. This will put pressure on President Trump to do something. This could give also him an opportunity to move the focus off the Comey problem and back on to the geopolitical scene. However, any action against North Korea has significant risk because of Seoul being only 37 miles from the border with 20,000 pieces of artillery aimed in its direction.

With the MACD sell signal only a day or two away on the best six months of the year strategy, I think this could be a pivotal week in the market. It is also option expiration and once those options expire, there is nothing to keep funds in the related equity positions. I would recommend caution in adding long positions.

Random Thoughts

Cautious bulls jumped back on the fence despite new highs in the market on Tue/Wed. The survey closes on Wednesday so the late week declines are not in the numbers. It was interesting that bearish sentiment did not budge. Neutral sentiment is now 6% over the average and most of that came from last week.

Last week results

The founder of the world's largest hedge fund said the "magnitude of the next downturn will be epic." Bridgewater's Ray Dalio said the global economy is "at or near its best" with few, if any major risks on the horizon. However, "we fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, will likely produce much greater social and political conflict than currently exists."

He said, after 8 years of rebound the global growth is stabilizing. However, central bankers have stimulated this long-term growth by keeping interest rates at abnormally low levels. Meanwhile, President Trump has vowed to implement an array of policies that will stoke fresh animal spirits in the U.S. economy and equity investors worldwide appear to have pinned their hopes on those pro business policies coming to fruition.

Dalio warned that debt is building in the system and pension and healthcare entitlements are slowly rising to squeeze the economy and the market.

"The US is in a period of exceptional political uncertainty as the new administration's policies continue to take shape." He believes equity investors may have 1-2 years of additional gains before the music stops.

I am sure everyone has heard about the ransom ware outbreak in 74 countries. The malware is triggered by an email click then runs rampant on office networks to infect every computer it can find. Your files are encrypted and you have to pay a ransom in Bitcoin to get them released. After 3 days the price doubles.

An enterprising 22-yr old malware research tech in the UK stumbled on to the "kill switch" on Saturday morning. While dissecting the malware code they discovered a call to a nonexistent website. If the call to the website came back unsuccessful, the malware was executed on the PC and the propagation begun. If the website responded present, the code self destructed and that attack ended. The tech quickly registered the nonexistent website and pointed it to a "sinkhole" server and the outbreak immediately stopped. It took several hours for the existence of the website to propagate across the global Internet but once it did, the outbreak was over. Our servers were attacked continuously from late Friday afternoon until the attack ended late Saturday. We have good firewalls so we could watch the attacks occur even though they were being blocked. Millions of people owe that technician a thank you.

40 years ago in a galaxy far, far away, a new science fantasy film that cost a whopping $10 million to make, was opening at the box office. Star Wars opened at the box office on May 25th, 1977. I can still remember waiting in line to see the picture and being amazed by the opening scene with the Star Cruiser soaring over the top of the screen for what seemed like forever.

Star Wars had the best opening weekend since Jaws at $2.6 million from a puny 43 theaters. By the end of 1977 the film had grossed $197 million on a $10 million budget. By today's standards that is small. Guardian's of the Galaxy 2 opened last week at $175.9 million and almost the full year's take for Star Wars. Of course you would have to convert 1977 dollars to 2017 dollars to make a fair comparison. ($197 million in 1977 equals $788 million today) Star Wars has only made $775 million in total but it spawned billions of dollars of prequels, sequels and associated product sales.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

In Play Updates and Reviews

That Time of Year

by Jim Brown

We are approaching the annual Russell rebalance and Friday was ranking day. Each year the Russell 3000, 2000, 1000 are rebalanced on the last Friday in June. Friday was ranking day where Russell calculates the market cap of all the stocks in the market to determine which stocks are entering/leaving the Russell indexes. Hedge funds also calculate the market caps on the days leading up to Friday and they try to anticipate which stocks Russell will add/remove. The actual lists are not released until the middle of June but starting on Friday hedge funds buy and sell from their own internal rankings in an attempt to get in front of the rebalance. This may have had some impact on the Russell on Friday. The Russell 2000 failed at support and is now broken.

The decline in the big caps and small caps at the same time is a bad sign. The Nasdaq managed to remain positive thanks to Amazon and Apple. With both of those stocks very overbought the current Nasdaq trend cannot be sustained much longer.

The decline in the small cap index weighed on all our positions. I am going to continue to reduce the number of positions to avoid a wipe out when the market drop finally occurs.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Lottery Ticket Plays - Updated only on Weekends

Current Position Changes

No Changes

If you are looking for a different type of trading strategy, try these newsletters:

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

The Habit Restaurants, Inc., a holding company, operates fast casual restaurants under The Habit Burger Grill name. It specializes in offering fresh made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade albacore tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. As of March 2, 2017, the company operated approximately 170 restaurants in 15 locations in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, and Maryland, the United States; and the United Arab Emirates. The Habit Restaurants, Inc. was founded in 1969 and is headquartered in Irvine, California. Company description from FinViz.com.

Habit reported revenue of $78.6 million that increased 17.4%. Earnings were 9 cents. Same store sales rose +0.9% despite the flooding in California in Q1. That is where they have the most stores. This was their 53rd quarter of consecutive same store sales growth. They opened 3 new stores in the quarter to total 165 company operated locations and 13 franchised locations.

They guided for the full year for revenue of $338-$342 million. Same store sales of 2%. They will open 31-33 company operated stores and 5-7 franchised stores.

The company had $49.5 million in cash and no debt other than $9 million in short term lease-financing costs for stores under construction.

Earnings August 2nd.

Habit dies not suffer from the same discounting problem afflicting other QSR chains. Habit has a solid repeat customer base and they keep this base faithful by offering new premium menu items on a limited time basis every few weeks. By introducing short term premium specials they attract customers back into the stores every time. That creates repeat business between the announcement of new menu items. By not continuing them on the menu, it keeps their inventory costs lower and causes people to rush in to get the next special because they know it is going away.

They implemented digital advertising program during the quarter and expanded their email mailing list from 278,000 to 538,000 using a promotion for a free Charburger. The redemption rate was 49%, which is unheard of in fast food retailing. The average amount spent when customers redeemed the special was $3.85, which consisted of additional high profit items like fries and drinks. In reality, the special had no material cost and doubled the size of their email list.

It appears HABT shares are about to break out to a new leg higher after the two week pause for earnings.

CEO said 2017 revenues should rise about 14% to $8 billion. Minor gain in a weak market .

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season. Hopefully those declines will begin soon and the repair process can begin.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Update 5/8/17: Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Only a minor decline but a new closing low. If the market bullishness continues, the VXX should continue to bleed points. Long term, the VXX always goes down.

Original Trade Description: April 12th.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong market gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

CEMEX, S.A.B. de C.V. produces, markets, distributes, and sells cement, ready-mix concrete, aggregates, and other construction materials in Mexico and internationally. The company also offers various complementary construction products, including asphalt products; concrete blocks and roof tiles; architectural products; concrete pipes for storm and sanitary sewers applications; and other precast products comprising rail products, concrete floors, box culverts, bridges, drainage basins, barriers, and parking curbs. In addition, it provides building solutions for housing projects, pavement projects, and green building consultancy services; and information technology solutions and services. The company has operations in Mexico, the United States, Northern Europe, the Mediterranean, South America, the Caribbean, and Asia. Company description from FinViz.com.

Bernstein Research researched all the contractors that could supply materials for a border wall. In the Bernstein map below Cemex is represented by the red blocks. Building 1,000 miles of wall, which is what Trump has promised will take a lot of concrete.

Cemex is one of the world's largest suppliers of cement and readymix concrete. Analysts believe the wall will cost between $15 to $25 billion to build and concrete would be a major expense. Based on various comments about what Trump is asking for, analysts expect 7 feet deep and up to 40 ft high for 1,000 miles. That will take 7.1 million cubic meters of concrete worth $700 million. However, engineers believe it would be easier and cheaper to build precast panels like the wall in Israel and other places. That would allow the panels to be constructed close to Cemex locations and not have 1,000 concrete trucks rotating up and down the wall every day. The picture below is the Israeli wall made with concrete panels and it stretches 420 miles.

Regardless of how the wall is constructed, it will take a lot of concrete and Cemex is going to be a supplier. Cemex has a large presence in the U.S. so it is immune from the US First rule.

Update 2/2/17: The secretary of Homeland Security said they are planning to complete the border wall in less than two years. They plan on a crash construction project in the heavily traffic areas and then fill in the blanks over the next two years. That means once construction begins it could be in multiple locations at once and the velocity could be extreme in order to get most of it done before the 2018 elections.

Update 2/10/17: CX said sales rose 4% in Q4 to $3.2 billion. EBITDA rose 10% to $654 million and +15% for the full year to $2.7 billion. Free cash flow rose 91% to $1.7billion in 2016. Debt declined by $2.3billion. Asset sales reached $2 billion of which $1 billion will close in 2017. .

Update 3/17/17: Cemex did not bid on the border wall. The company said they felt it would be bad faith and they could face repercussions from their home company of Mexico even though they have multiple concrete plants on both side of the border. However, they did say if a contractor asked for prices for cement they would be obliged to provide those prices and supply the cement.

Cemex is reducing debt by as much as $4 billion through price hikes and asset sales. They expect revenue from the U.S. to rise by $550 million in 2017 without any impact from the wall. In their analyst meeting last week the tone was positive and they expect overall revenue to rise 4% to 6%. That would rise if any infrastructure spending programs were enacted.

Update 3/25/17: Mexico warned Mexican companies it would not be in their best interest to participate in building the border wall between the two countries. The government said it was not going to pass a sanctions law but consumers would know and they would likely boycott any company that participated.

Cemex has said they would not participate but did say they would provide raw materials if asked by the eventual bid winners. Competitor Grupo Cemantos has said they would participate in the project.

The U.S. government said they had received expressions of interest from 720 companies to build the wall or supply components and services.

Update 4/28/17: The company reported a ten-fold increase in quarterly profits aided by asset sales. Cemex earned $336 million in Q1 compared to the $35 million in the year ago quarter. They made $152 million on selling a concrete tube business in the U.S. and $98 million on selling part of a unit in the GCC. They have another $320 million in announced asset sales set to close. Revenue rose 6% on a constant currency basis and debt fell -3.7% to $12.16 billion. Shares are trying to push through resistance at $9.25.

Earnings May 2nd.

CX shares have already spiked in January once it became apparent the wall was actually going to happen. The stock broke out to a new high on Wednesday and probably has a long way to go.

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compares to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Update 5/5/17: Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

No specific news. The post earnings rebound faded slightly byt $11 should be support. There are still rumors about a possible Wal-Mart acquisition.

Original Trade Description: March 15th

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers.
Company description from FinViz.com.

Etsy reported earnings of 3 cents that beat estimates for a penny. Revenue of $110.2 million also beat estimates for $106.9 million. Merchandise sold rose 16.7% to $865.2 million. The stock was crushed because the company guided for higher costs. However, there was a good reason and shares are starting to rise again.

Etsy is an ecommerce website where crafters can post and sell their wares. So far, so good. The company has come up with the great idea to sell craft supplies on the website so other existing crafters plus all the people shopping the website can buy their supplies there as well. Not only will the company provide supplies but they are adding tutorials and other craft ideas. That will make the site even more "sticky." This is scheduled to launch in April.

In addition, they introduced Google Shopping on the website and launched their first ever global brand campaign. They have changed the backend of the seller website to provide a new seller dashboard and new application called Shop Manager.

I think this expansion is a great idea. Where other retail websites are stagnant, Etsy is growing rapidly and these new features will increase viewers, buyers and sellers. The knee jerk decline in the stock price on the rise in expenses was a buying opportunity.

Update 4/22/17: On Friday the Australian Tax Office warned overseas sellers their websites would be blocked if they did not comply with the GST LVG tax laws in Australia. Ebay, Alibaba, Amazon, Etsy and others have complained they are not sellers. They merely match buyers and sellers for a commission. Ebay and Etsy do not collect the money so they cannot pay the tax. The tax only applies to vendors that sell $75,000 a year and therefore any forced collection could not be implemented until a vendor reached that level. It would be impossible to then go back and collect the tax from the vendor for the first $75,000 sold.

Shares were trading at an 8-week high on Thursday. Major sell off on Friday's news. The company said it would report earnings on May 2nd.

Update 5/5/17: Etsy reported a breakeven quarter for earnings that matched estimates. Revenue of $97 million missed estimates for $98.4 million. They also announced a new CEO to replace Chad Dickerson who will be leaving at the end of May. They announced layoffs for 8% of their workforce. Shares plunged on the earnings to a low of $9.90 but rallied on Thr/Fri back to $11.67 and a 10% move on Friday alone to close at a 2-month high.